Taylor Corporation manufacturers disposable thermometers that are sold to hospitals through network of independent sales agents located in Canada. These sales agents are not employees of Taylor corporation. The agents sell a wide variety of products to hospitals including Taylors disposable thermometers. Sales agents are currently paid an 18% commission on sales and this commission rate was used when Taylors management prepared the following budgeted income statement for the upcoming year:

Taylor Corporation Budgeted Income Statement
Sales		$31,000,000
Cost of goods sold
Variable	17,980,000
Fixed	2,800,000	20,780,000
Gross margin		10,220,000
Selling and administrative expenses
Commissions to sales agents	5,580,000
Fixed advertising expenses	800,000
Fixed administrative expenses	3,200,000	9,580,000
Net operating income		$640,000

Since the completion of the budgeted income statement, shown above, Taylor's management has learned that the independent sales agents are demanding an increase in the commission rate to 20% of sales for the upcoming year. This would be the third increase in commissions demanded by the independent sales agents in five years. As a result, Taylor's management has decided to investigate the possibility of hiring its own sales staff to replace the independent agents.

If the company employs its own sales force the CFO estimates that the company will have to:

• hire eight salespeople to cover the current market area and the total annual payroll cost of these employees will be about $700,000 including benefits.
• Pay the salespeople a commission of 10% on sales.
• incur travel and entertainment expenses of $400,000 per year.
• Hire a sales manager and support staff whose salaries and benefits will come to $200,000 per year.
• Spend an additional $500,000 on fixed advertising expenses (To make up for the promotions that the independent sales agents have been running on behalf of Taylor).

Required

1. Assuming sales of $31 million, prepare a budgeted contribution format income statement for the upcoming year for each of the following alternatives:

1. the independent sales agents commission rate remains unchanged at 18%
2. the independent sales agents commission rate increases to 20%
3. the company employs its own salesforce

1. Calculate Taylors 1) break-even point in sales dollars and 2) margin of safety in dollars and % for the upcoming year assuming the following
   1. the independent sales agents commission rate remains unchanged at 18%

1. the independent sales agents commission rate increases to 20%
2. the company employs its own salesforce

1. Calculate the degree of operating leverage for the upcoming year assuming the following

1. the independent sales agents commission rate remains unchanged at 18%
2. the independent sales agents commission rate increases to 20%
3. the company employs its own salesforce

1. If the company employs its own salesforce, what volume of sales would be necessary to generate net operating income of $20,000 the same level of net income projected if Taylor continues to sell through agents and pays them a 20% commission.

1. Using the degree of operating leverage computed in 3 above, calculate the net income is sales increase by 20% assuming the following:

1. the independent sales agents commission rate remains unchanged at 18%
2. the independent sales agents commission rate increases to 20%
3. the company employs its own salesforce

1. Write a memo to the president of Taylor corporation in which you recommend whether the company should continue to use the independent sales agents at a 20% Commission or employ its own sales force. Fully explain the reasons for your recommendation in the memo.